You purchase a bond for $875. It pays $80 a year (that is, the semiannual coupon is 4%), and the bond matures after 10 years. What is the yield to maturity?
Determine the current market prices of the following $1,000 bonds if the comparable rate is 10% and answer the following questions.
- XY 5.25% (interest paid annually) for 20 years AB 14% (interest paid annually) for 20 years
- Which bond has a current yield that exceeds the yield to maturity?
- Which bond may you expect to be called? Why?
- If CD, Inc., has a bond with a 5.25% coupon and a maturity of 20 years but which was lower rated, what would be its price relative to the XY, Inc., bond? Explain.